Analysis of Politics, Philosophy and Economics from a Marxist Perspective

Friday, 28 April 2017

UK GDP Data Shows The Economy Is Starting to Stagflate

The GDP data for the first quarter, for the UK, has come in at just 0.3%, as against forecasts, which themselves anticipated a sharp slow down, to just 0.4%. The figure represents a drop of more than 50%, on the quarterly growth figure of 0.7% at the end of last year. At the same time, the fall in the pound, resulting from Brexit, has caused imported inflation to start to surge, at a time when stronger economic growth in the EU, and globally is causing global inflation itself to rise, putting additional cost pressures in a fragile UK economy. Nearly all of the growth in the UK economy over the last year or so has been down to credit financed consumer spending, whilst UK household debt levels are back to those last seen ahead of the 2008 financial meltdown. As I wrote, last year Britain is headed for stagflation.

We might see inflation tick down slightly for the next month, because following the announcement of the General Election, the Pound has strengthened against the dollar by around 5%. But, at $1.29, it is still considerably down from its rate prior to the Brexit vote, and down even more from its rate in 2015, when it stood at around $1.70, and rising. The stronger pound seems to be a delusion in markets that the announcement of the election will be a means of May, orchestrating a soft Brexit, by having more room to face down her backbenches. It won't. Tories at a local level are likely to select even more hard right, Brexiteers as candidates. Moreover, May has already said she doesn't even want to be in the Customs Union or Single Market, so what negotiations are there to have? Merkel has quite rightly reinforced what Juncker said some time ago. there is a chance between hard Brexit and no Brexit. Far from the election being about room to negotiate a soft Brexit, it is about May knowing that today's GDP data is just the start of the bad news; it is about May preparing to just pull out of negotiations in a couple of months time, and announce that they are going to just repeal the 1972 European Communities Act, taking Britain out of Europe at a stroke.

Inflation is already above 2.3%, and rising. As the Pound continues to drop, and as global prices for things like materials, energy, and food prices, all of which Britain imports in large quantities, that inflation rate is likely to rise sharply. At the same time, wages in the UK are falling causing a squeeze on real wages, which is feeding through to consumer spending figures. Given that the UK GDP figure has been reliant on consumer spending, with investment at low levels, that spells further problems for the UK economy, in the near future.

UK households have maxed out their credit cards to finance their spending, and only that spending has kept the UK economy going. As wages fall, and consumers are unable to finance further spending by yet more debt, and as inflation rises, spending will get increasingly squeezed, also squeezing UK profits. The hit to consumers has already been seen in the drop in house prices for a second consecutive month by Nationwide. That is just for asking prices, which as readers of this blog for some years will know are pretty meaningless, especially as aggregate figures. As I pointed out several years ago these house price figures are largely a fiction. Anyone who has been looking for a house in a specific area, as I have, for the last few years, will have seen how actual houses they have viewed or identified, have continued to fall in price, and actual selling prices, as opposed to asking prices are often 20% below the initial asking price.

That is despite the fact that government policy for the last 10 years, at least, has been geared to keeping both property prices and stock and bond prices high by what ever means, including giving government money away to the shareholders and bond holders in banks, and to house buyers in the various Help To Buy and Buy To Let Scams, and via hundreds of billions in money printing. All that has been done to keep those asset prices inflated, even at the cost of the real economy, as it helped to such further resources into such speculation, and away from investment in real productive capital. It caused the hyperinflation of asset prices to be protected at the cost of a deflation of consumer prices, and stagnation of the real economy.

Moreover, the rise in rents in recent years to record levels, which is a consequence of house prices being driven to ridiculously, and unsustainably high levels, and the pricing out of increasing numbers of people from the housing market, has only been sustained by yet more subsidies to landlords, in the form of a ballooning bill for Housing Benefit. And, where does the money for that Housing Benefit come from? It comes from taxes, which means out of profits, which means less money available for real investment in productive-capacity, fewer jobs, and less real wealth as the cost of protecting fictitious wealth. Adam Smith and David Ricardo understood these principles more than 200 years ago, but the Tories in order to keep these paper prices inflated are prepared to destroy all real wealth and ignore those basic economic laws. It is also why Theresa may wants to set herself up as an authoritarian strongman, knowing that as the economic reality bites, the only way they can continue to try to defy the laws of economics is by imposing increasing pain on the ordinary citizen.

They know that they had tied themselves in over tax in the previous Tory Manifesto, and that their commitments on pensions were not going to be sustainable after Brexit, as the economy stagnates. So, they have gone for an election now, so as to be able to inflict all that pain on ordinary families over the next five years, slashing real wages further, raising taxes and national insurance, scrapping the triple lock on pensions, willing to see unemployment rise "as a price worth paying", as they put it in Thatcher's time, and seeing increasing numbers of people put on zero hours contracts, and other forms of unstable working conditions.

We need to get rid of the Tories before its too late, and the only party that can offer an alternative government is Labour.

About Me

Left school at 16. Became an ASTMS shop steward at 19, and a lifelong trade union activist. Delegate to North Staffs Trades Council 1974-87. Secretary North Staffs Miners Support Committee 1984-5. President North Staffs Trades Council 1985-6 and 1986-7. Delegate to Staffordshire Association of Trades Councils 1985-7. Delegate West Midlands Regional Council of the TUC 1985-7. Secretary Newcastle UNISON 2000-2.
Member of the International Communist League/Workers Socialist League 1974-87.
Went to University as mature student at age of 24. Obtained Joint Honours Degree in Economics and Politics with Philosophy and Statistics, followed by a Post Graduate Certificate in Education.
Labour Party member since 1974. Stoke City Councillor 1983-4, expelled from Labour group 1983, and resigned from Council in 1984 because of refusing to vote for rent and rate rises, and budget cuts. Staffordshire County Councillor 1997-2005.
Assistant Secretary Stoke District Labour Party 1981, and held pretty much every position from Executive member, to Branch Secretary, and Branch Chair.